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No one in their right mind, you’d think, would pay a pay a professional to do a job when, in all likelihood, they could actually do it better without them. Yet that’s precisely what investors do when they buy an actively managed fund.
This is what Warren Buffett said at the weekend, at the annual meeting of his investment company, Berkshire Hathaway:
“If you go to a dentist, if you hire a plumber, in all the professions, there is value added by the professionals as a group compared to doing it yourself or just randomly picking laymen. In the investment world it isn’t true. The active group, the people that are professionals in aggregate, are not, cannot, do better than the aggregate of the people who just sit tight.”
That’s right. The average index fund investor must outperform the average active investor net of costs.
This is what else Buffett had to say:
Hedge fund managers
“How many hedge fund managers in the last 40 years have said ‘I only want to get paid if I do something for you? Unless I actually deliver something beyond what you can get yourself, I don’t want to get paid.’ It just doesn’t happen.”
Hedge fund fees
“If you even have a billion dollar fund and get two percent of it, for terrible performance, that’s $20 million. In any other field, it would just blow your mind.”
Fund industry marketing
“The huge money is in selling people the idea that you can do something magical for them.”
The biggest thorn in the flesh of active management continues to be the most famous active investor of all.
Related posts:
Buffett: Stick with low-cost index funds
Buffet: The simple math that means indexing must win
The gospel according to Buffett
ROBIN POWELL is a freelance journalist and the founding editor of The Evidence-Based Investor. Based in Birmingham, England, he founded Ember Television and Regis Media, and he specialties in helping disruptive financial firms to grow. He also campaigns for a fair, transparent and sustainable investing industry. You can follow him on Twitter at @RobinJPowell.